Department of Small Business Development remedial plans on Oversight Reports Recommendations

15 November 2017

Chairperson: Ms N Bhengu (ANC)

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Meeting Summary

The Department of Small Business Development (DSBD) presented its remedial plans in response to the recommendations contained in the Portfolio Committee’s (PC’s) reports, following oversight visits conducted in KwaZulu-Natal, Limpopo and Mpumalanga.

The Committee’s key recommendations were that the Department should:

Coordinate, guide and monitor all departments in supporting the establishment, development and sustainability of small, medium and micro enterprises (SMMEs) and cooperatives.

Provide comprehensive support to SMMEs and cooperatives, as funding alone did not ensure sustainability.

Strengthen its intergovernmental relations (IGR) coordination, particularly with the municipalities where these cooperatives were located.

Review the approval procedures for the Cooperatives Incentive Scheme (CIS) to address the shortcomings identified by the PC. Key factors that determined the viability of the cooperatives were not considered, such as access to land, electricity, water and relevant infrastructure.

Eliminate the prevalence of corruption identified by the PC. It recommended that a forensic investigation be conducted to ascertain the facts and accordingly implement corrective action.

Strengthen its marketing and advocacy efforts, particularly in other spheres of government, to facilitate the implementation of the 30% procurement policy.

Conclude transversal agreements with other departments and spheres of government to facilitate the development of SMMEs and cooperatives.

Intensify efforts in respect of reducing red tape that hindered the sustainability of cooperatives and SMMEs.

The Department outlined a wide range of remedial action plans for addressing the recommendations, focusing on the coordination of the public sector to support the growth and sustainability of SMMEs and coops. It had established and institutionalised an inter-provincial coordinating committee and a national inter-departmental coordinating committee comprising all national departments. These structures, chaired by the Director General (DG), fostered advocacy, coordination, a sense of common purpose and monitoring of other departments in their support of cooperatives and SMMEs. It was a platform where the DSBD could lobby and influence other state institutions to advance the support and development of cooperatives and SMMEs.

Other key areas which the Department committed to addressing included a review of the integrated strategy for the promotion and development of cooperatives, strengthening IGR with district and local government structures, rooting out fraud and instituting disciplinary action against officials, strengthening the DSBD’s marketing, branding and advocacy, entering into transversal agreements, and taking steps to reduce the “red tape” hindering its progress.

Members asked about the pieces of legislation that hampered the Department’s efforts to address its shortcomings; the extent and details of transversal agreements with the private sector; the capacity of its internal audit committee; how the Department could exercise its oversight role over its agencies, like the Small Enterprise Development and Finance Agencies, if it was not adequately capacitated; whether the its interventions had the potential to increase the contribution of cooperatives to the economy; and whether adequate action was being taken against transgressing officials.

Meeting report

Department of Small Business Development (DSBD) on remedial plans

Ms Edith Vries, Director-General: DSBD, said the purpose of the presentation was to present a remedial plan in response to the recommendations contained in the Portfolio Committee’s (PC’s) reports following oversight visits conducted in KwaZulu-Natal, Limpopo and Mpumalanga.

The key recommendations of oversight reports were that the Department should:

Coordinate, guide and monitor all departments in supporting the establishment, development and sustainability of small, medium and micro enterprises (SMMEs) and cooperatives.

Provide comprehensive support to SMMEs and cooperatives, as funding alone did not ensure sustainability.

Strengthen its intergovernmental relations (IGR) coordination, particularly with the municipalities where these cooperatives were located.

Review the approval procedures for the Cooperatives Incentive Scheme (CIS) to address the shortcomings identified by the PC. Key factors that determined the viability of the cooperatives were not considered, such as access to land, electricity, water and relevant infrastructure.

Eliminate the prevalence of corruption identified by the PC. It recommended that a forensic investigation be conducted to ascertain the facts and accordingly implement corrective action.

Strengthen its marketing and advocacy efforts, particularly in other spheres of government, to facilitate the implementation of the 30% procurement policy.

Conclude transversal agreements with other departments and spheres of government to facilitate the development of SMMEs and cooperatives.

Intensify efforts in respect of reducing red tape that hindered the sustainability of cooperatives and SMMEs

The DG outlined the following remedial action plans for addressing the recommendations, focusing on the coordination of the public sector to support the growth and sustainability of SMMEs and Coops. The Department had established and institutionalised an inter-provincial coordinating committee and a national inter-departmental coordinating committee comprising all national departments. These structures, chaired by the Director General (DG), fostered advocacy, coordination, a sense of common purpose and monitoring of other departments in their support of cooperatives and SMMEs. It was a platform where the DSBD could lobby and influence other state institutions to advance the support and development of cooperatives and SMMEs.

The national inter-departmental coordinating committee was championed by, and reported to, the DGs in the Economic Sectors, Employment and Infrastructure Development (ESEID) cluster. The Minister, with the support of several Members of Executive Committees (MECs) for Economic Development, was in the process of establishing a Small Business Development (SBD) Ministers and Members of Executive Council (MINMEC), as the current arrangement of an Economic Development MINMEC coordinated by the Minister for Economic Development had not advanced the small business development mandate. The existing inter-provincial coordinating committee, which meets quarterly, would become the technical committee supporting the SBD-MINMEC. The inaugural SBD-MINMEC was scheduled for March 2018.

There had been a review of the integrated strategy for the promotion and development of cooperatives, which would culminate with ushering in of a new strategy and integrated model of cooperative development in the 2018/19 financial year.

To strengthen IGR with district and local government structures, the Department had commenced a process of introducing the cooperatives to other structures of government, particularly the local municipalities, to enable them to draw support from these structures, The DG had therefore written to all district municipalities (DMs) and provided them with a list of funded cooperatives in their districts in order to solicit support. There had been very little response to this intervention.

In respect of the KZN Abalimi Cooperatives, there had been several meetings with affected DMs and municipalities. A number of draft agreements were in place to ensure that they were included in the Integrated Development Plans (IDPs), and that they could access support from the Municipalities.

Following the action research project to determine the developmental status of the 400 DSBD-funded cooperatives, the Department had concluded the report which had been presented to the Committee. A number of commitments were made, and the Department committed to providing the Committee with updates.

A Memorandum of Agreement (MoA) had been finalised with the Local Government Sector Education and Training Authority (SETA).

A planned summit meeting would, amongst other issues, address advocacy and lobbying for the development of cooperatives and SMMEs in local government, such as the inclusion of the cooperatives in the agendas and IPDs of the municipalities and a reduction of the red tape which hindered the sustainability of cooperatives.

Ms Vries described the Department’s approach to rooting out fraud and instituting disciplinary action against officials.

The Department had adopted a zero-tolerance policy on fraud and corruption. While it had a fraud prevention policy, strategy and plan, more must and would be done to popularise these instruments. It also had a whistle-blowing policy

The Department could not act against officials named in the MP report. It was required to conduct a proper investigation into the matter. The corrective measures that would be taken by the Department would be informed by the results and the recommendations of the investigation.

The Department did not have investigative capacity. The Department of Trade and Industry (DTI) had previously assisted the DSBD with investigations, but it could no longer extend this service.

The Department had approached the office of the Auditor General (AG), but it transpired that it was going to take longer to conclude the pre-engagement processes before the investigation could commence. The Department was therefore in the process of sourcing the service through the transversal contract from National Treasury, following which the investigation would be completed and the report provided to the PC.

The Department was also planning a comprehensive review of its incentive programmes – the Cooperative Incentive Scheme (CIS) and the Black Business Supplier Development Programme (BBSDP). This review would assist in properly analyzing the shortcomings identified in the CIS to ensure that these were corrected in the reviewed programme.

While awaiting this review, the Department immediately after receiving the MP report, had initiated a review of the standard operating procedures (SOPs) of the CIS to strengthen controls to address the obvious weaknesses. Several stakeholder workshops had been conducted to inform the amendment of the CIS SOPs to close the loopholes and address the shortcomings identified by the PC. The review of these SOPs would address the problem in the short term.

To strengthen marketing, branding and advocacy, the DSBD had developed a draft marketing stakeholder plan. This plan included advocacy in respect of the 30% procurement requirements for cooperatives and SMMEs, as well as market access. However, the Department had not been able to implement this plan as it was hamstrung by resource constraints in terms of both human resource capacity and budget

The signing of transversal agreements was a priority for the Department, and was provided for in the annual performance plans (APPs).

In line with the DSBD’s objective of “Sustainable partnerships to support the SMME and cooperatives development agenda,” the Department had defined targets in respect of the rand value of resources leveraged through partnerships with sector stakeholders per annum, and the number of partnership agreements signed. Transversal agreements entered into made provision for the specific procurement of goods and services from cooperatives and SMMEs in all spheres of government. The Department was monitoring the implementation of past and current agreements through its partnerships directorate. Agreements prioritised for the next four months included the Department of Cooperative Development and Traditional Affairs (COGTA), the Department of Agriculture, Forestry and Fisheries (DAFF), and National Treasury (NT).

Red tape reduction was provided for in the APP of the Department. In addition to analysing and re-engineering the administrative procedures at the local government level, this had been extended to national government. A comprehensive research study would also be concluded on the red tape at the provincial level of government during the 2017/18 financial year.

As a way forward, a detailed matrix (tracking tool) had been completed with all the recommendations from the PC’s oversight reports. The DSBD would monitor progress based on this matrix. The documents requested by the PC would be provided to the Committee Secretariat. The report back would be provided following the completion of the investigation into the incidents of corruption identified by the PC and by the Department.

Discussion

Ms N Mthembu (ANC) expressed her concern that the Department needed to be felt by the people on the ground. The DSBD was doing well, but sometimes it was not enough. People had not yet felt the visibility of the Department, and somehow it appeared that people were not aware of it. It had to move with speed in dealing with the recommendations and remedial plans presented today.

She asked the DG to identify areas in pieces of legislation that were a hindrance to the Department in addressing its shortcomings. Regarding the transversal agreements, the DSBD had limited itself to government, and the private sector was not mentioned at all. It had a responsibility to play its own part, and she asked the DG to indicate whether there were any transversal agreements with the private sector. With regard to increasing the funding for the CIS from R350 000, it would not be practical to assist a substantial number of cooperatives. She expected the DG to indicate a strategy that was being developed in order to be able to assist more cooperatives through creative and innovative ways.

Mr N Capa (ANC) was concerned about the transversal agreements which had become a key recommendation only now, when the whole time he had thought it was a requirement. It had been stated that the new strategy for the integrated model of cooperative development would culminate in the following financial year. He felt that this was too long, and asked what had been happening thus far and how this strategy would come to fruition. He was worried that the DSBD was failing to act against transgressing officials. Investigations were still on-going, and the process that was being undertaken made it seem as though these transgressions were being taken lightly. He commented that a comprehensive research study should be concluded on the red tape in following financial year, as outlined in the presentation, and that this was one area that had been taken seriously by the Committee. However, the processes were being delayed by the Department.

DSBD’s response

The DG responded that it was a fair comment from Ms Mthembu to encourage the Department to make itself more visible to the public.

Of the 12 000 cooperatives that came on to the DSBD’s database, the Department could support only 400, which was an indication of the lack of resources and funding. Working with other departments, the DSBD believed that it would be able to expand its footprint. Most people that were now successful did not spread the word on the support that they had received from the government -- for instance, fashion designer David Tlale, who was now successful and world-recognised in the industry.

In order to improve its capacity, particularly with regard to visibility, the DSBD would offer an internship programme for journalism students in order to assist it by putting the Department out there. She wished that all the officials from the agencies and the Department could see themselves as under one umbrella and speak the same language, because the Small Enterprise Finance Agency (Sefa) and the Small Enterprise Development Agency (Seda) were both under the DSBD. There had to be unity in order to put the Department and its agencies out in the communities.

Referring to the insufficient funding and what the Department had done to bring this to a halt, she said Members would recall that the DSBD introduced a research function only as from 1 April 2016, and before then it did not have a research capacity. Considering the work that was being done now, she encouraged the Members to see this from that perspective.

As for legislation, it came as a surprise that when the Department was listening to SMMEs and coops, they had indicated that they were not looking for hand outs, but for opportunities. There were very limited opportunities provided for SMMEs and coops.

The DSBD’s relationship with the Companies and Intellectual Property Commission (CIPC) was solid, and it had indicated that the R120 per annum paid by companies for their annual returns was relied upon as revenue, so if they cut that off as a form of reducing red tape, it would affect the revenue.

Regarding working with the private sector, the DSBD had partnered with South African Breweries (SAB), Dunlop and Nestle. They were all moving to set up SMMEs to be in their value chain. It was imperative to also put the private sector out there, especially those partnerships that were contributing towards assisting the development of SMMEs and coops, as this would encourage more companies in the private sector to contribute. She indicated that she had built a relationship with a small business institute which holds annual indaba’s for SMMES, and aimed to change perceptions of government. The SAB contract benefited 36 cooperatives, so there were agreements in place.

The Department was still finalising agreements in connection with the R350 000 funding for coops. It was looking for innovative ways in which that funding could be increased and so more coops could be supported. The Department was also working with the private sector in this regard. In addition to capacitating the DSBD and increasing its visibility, next week the Department would advertise a post for advertisement/marketing director. It was looking for someone who had negotiation skills to fill that post -- an individual who would be able to negotiate deals for the Department. Transversal agreements were not something that was new, but they had been indicated in the presentation as a key recommendation.

Mr Jeff Ndumo, Chief Director: DSBD, said that the Department had reviewed the process for CIS funding, and was about to conclude that particular project. When it had engaged with the Abalima Cooperative, it was indicated that indeed the R350 000 funding was not sufficient, and when one supported agricultural projects the resources needed to be sufficient to respond to challenges. The DSBD was now increasing the amount to the level where it could cover those coops adequately. It was going to go through the Minister to be approved, and then the Department would come back and report to the Committee. Increasing the incentive would lead to balancing out the increase by being more and stringent in terms of selection. Basically, the Department could support only a limited number of coops at any point in time. It would be funding individual cooperatives, but in future it wanted to fund cluster cooperatives that would be able to administer individual cooperatives.

The Department was reviewing the integrated strategy that was adopted by government ten years ago to look into its impact. Once this process had been completed, the Department would then be able to come up with a clear integrated strategy that would address the gaps in the old integrated strategy and enhance the impact. It was only in the following financial year that this process would come to fruition.

Ms Brigette Peterson, Director: Corporate Services, DSBD responded that in taking action against the official referred to in the presentation, the DSBD was very careful to handle the matter, because it had to operate within the applicable framework. Out of caution, the person had now been moved out of the space where the transgression had taken place while the investigation was under way. Only after the investigation had been concluded would the Department take the appropriate action.

The Chairperson asked whether there was an internal committee that was able to do investigations that were related to suspected fraudulent activities within the Department. The same recommendations regarding suspected fraudulent activities had been made to Sefa, and it had embarked on an investigation and reported back to the Committee. Its internal investigation had confirmed the Committee’s suspicions of fraudulent or corrupt activities. If it did not have the capacity to perform its own investigation, how would the Department exercise its oversight role on Sefa and Seda? The Department had a responsibility to do an investigation at Sefa as an oversight body, but had not done so.

Ms Nobuhle Buthelezi, Director: Internal Audit, DSBD said the Department did have an internal audit function, but forensic investigation was a different set of skills, and an ordinary audit function could not perform a forensic investigation. The DSBD was in the process of procuring its own capacity to strengthen the audit function, but it was still relatively small at the moment.

Ms Vries added that the DSBD did have an audit committee, which was comprised of four members, that was external. The Department’s audit capacity was one person who had been transferred from the Dti to the DSBD. It was aware of its oversight role over Sefa and Seda, but currently it did not have the capacity to perform its oversight role effectively. The Department needed to re-train people and get new competencies.

The people who had been transferred from the Dti were at a very junior level and lacked the competencies that were required by the DSBD. There was an accounting authority at Seda, and those were the people that needed to be held to account, and to exercise authority. The Department could not constantly check up on the agencies because there were accounting authorities that were strategically placed to account. However, the Department welcomed the Committee’s perspective on strengthening its oversight over its agencies. This was something that would be looked into.

The Chairperson agreed with the DG, but it still did not take away the oversight role of the DSBD. Sefa and Seda were implementing agents of the Department, so the DSBD could not abrogate all the responsibility to the agencies -- the executive needed to be held accountable. However, one could not turn a blind eye on the accountability of the Department. When the Committee points out issues, it asks questions in order to open the Department’s eyes to the blind spots.

Mr T Chance (DA) referred to the viability of cooperatives, and said the points were well made in terms of issues that were not taken into account when issuing grants. He asked whether these cooperatives had the right to exist as a business. He was pleased to hear about the focus on clusters of cooperatives and secondary cooperatives. He asked the Department to put an emphasis on the secondary cooperatives, because they dealt with economies of scale, while some of the primary cooperatives were very small and scaled businesses – they were sitting in the middle. The economic model of cooperatives needed to be looked at very carefully.

It was a good idea to have greater cooperation between the departments, but one had to be mindful of over-bureaucracy, because that could lead to deadlock when different departments reported to different committees. He cautioned that there should be a clear separation of the roles.

Mr Chance said he had put a question to Treasury to ask about the contribution of cooperatives to the SA economy. Treasury had estimated the figure to be about R1 billion in an economy of R4 trillion, so it was a drop in the ocean. He asked whether the Department’s interventions had the potential to increase the contribution of cooperatives to the economy. It was important for the Department engage with Treasury so that it could understand the matrix of the economy.

The poor response from the municipalities was indeed worrisome. One of the things that could be said about the municipalities was that they were potentially driving the revenue line of their services. They should not see coops as a drain, but as potential channels to increase their revenues because once these cooperatives were up and running, they would be utilising municipal services.

He requested a full and comprehensive report on the SMME and Cooperatives Summit.

Regarding corruption by officials, some audits needed to be done on the lifestyles of former employees, not for the purpose of prosecuting them for past transgressions, but to gain some understanding on where they though loopholes could be plugged to reduce corruption and fraudulent behaviour or activities.

He asked whether the Department was doing the research on red tape and the eco-system by itself, and when the Committee could receive these reports. He also asked for an update on the Abalimi cooperative, as the last time the Committee had heard a report from the cooperative was that it was on the verge of collapsing, and there still a lot to be done to hit the ground running.

Ms Vries responded that the drive to grow a more inclusive economy had been on the agenda of the government since 1994, and by the time the DSBD had been formed, that mandate was spread across different government departments. There were about 10 departments that received support for the funding for SMMEs and coops. There was one government, so the DSBD did not necessarily have to support all the cooperatives and SMMEs. However, its job was to ensure that those resources were indeed channelled towards those businesses, and to coordinate and perform oversight. Basically, the Department did not necessarily have to absorb all the resources allocated to other departments for the support of SMMEs and Cooperatives, but to perform a coordinating role over those departments and ensure that those mandates were fulfilled.

The DSBD had no problem in calling out corruption. There were also other facilities that were available and being explored, but she could not divulge the details because it could undermine the intensity of the work that was being done. She gave an assurance that corruption would not happen on her watch.

The DSBD was not doing the red tape research by itself -- it had commissioned it and it had been outsourced. The research was planned to be concluded in March. On the eco-system, the Department was willing to come and share the results with the Committee when it engaged again.

Mr Ndumo said the DSBD had adopted the clustering approach in order to create economies of scale. As for the Abalimi cooperative, the Department had met with the Co-operative Workers’ Association (COWA) and engaged with them, but it had been a painful process. It had then tried to engage with COWA to get another third party to solicit support, but that had not been successful. However, the Department could not wait on its lawyers so it had gone out to engage the Agricultural Research Council to deal with the issues of agro-science, and they had committed to provide that service to the DSBD.

The DG added that currently the legislation compelled Seda to have an annual forum. The Department wanted to have a shared stakeholder platform between the Department and its agencies. In addition, the issue of feasibility was one of the obvious weaknesses in its support of the cooperatives. It was common cause that there was very little high value agricultural land in the Northern Cape, and all the sciences in that region showed that one could not grow wheat there. These were some of the issues that were beyond the control of the Department, but where it could assist it certainly does.

The Chairperson made her concluding remarks, saying that the Committee was not happy that money was going to be paid by the DSBD for the Nestle programme, and the Department should look at that carefully. The Committee was also concerned that the chief executive officer (CEO) of Sefa was also being remunerated as a board member of Seda, and the Department and the Minister were condoning the salary that was paid. The Committee did not agree with this, although it could not dictate what the Department should do when it came to those types of things.

The Committee would also like the Department to look at the review of the Small Business Act and fast-track that process. It had brought to the attention of the Department the process of identifying the felt needs of cooperatives and SMMEs as an on-going process. This was as a result of being inundated with letters of complaints from SMMEs that felt they were being mistreated by big businesses. These SMMEs needed some protection, and being a legislative structure, the Committee could not turn a blind eye to that. In the process of reviewing the Act, the Department needed to take that into consideration.

Another issue that came foward was on cooperatives, particularly what was in the Cooperative Act, where a secondary cooperative was viewed as a grade 2 cooperative – the cooperative first needed to be a primary cooperative for two years, then it could graduate to the secondary level. This was something that the Committee questioned, as this was not how it understood a secondary cooperative. She suggested that the Department also looks into this, and how it could be amended in the Act.

In the presentation, it was the first time one saw the IGR (Inter-governmental Relations) framework as a heading, and the sequencing demonstrated the understanding of the Department of its coordination role. Putting the IGR into practise provided an opportunity for the alignment of strategies for each municipality, and for the Department to use the IGR Act to take advantage of the national governmental spatial area planning.

In conclusion, she commended the establishment of the bilateral agreement between Cogta and the Department as work well done. She suggested perhaps a relationship between the DSBD and the Department of Rural Development and Land Reform could be established, as the latter owned farms and leased them out to people who were not utilising them.